My spouse and I had been planning to move to Japan quite soon. But, those plans have been put on hold. The reason we reluctantly gave up was that we found out that future non-Japanese pension income (ie: social security from the US) would be taxed all at once as part of the inheritance tax calculations.
With a hefty deduction for being a spouse that extra taxation is usually not a factor. But, when it does apply the amount of tax can be quite problematic. A key reason is that often retirees have a lot of their net worth invested in tax sheltered investments, not all of which are easy to access on short notice. It can lead to a cascade of taxation from other nations in which assets are based if a lot of money needs to be pulled out in a short time frame to pay a very large inheritance tax bill. If a large tax bill cannot be paid in full by the due date then, of course, interest charges, penalties, and potential asset seizures are all on the table. We consulted with an international accountant who is working with retirees who, because of this particular tax law, and at a stage in their life when they can no longer work, found themselves unable to pay the inheritance tax that they owed.
Younger spouses who inherit a foreign-based pension will be the ones who get the largest bill, other things being equal, because their inheritance tax calculations will be based on the assumption of them living longer. As another issue that can create even more problems for younger spouses who lose their partner, tax is calculated using prevailing payout rates as a starting point for non-Japanese pensions. But, with US-provided social security in rough shape there is a good chance that benefits will be noticeably cut at some point in the future. Thus, it is conceivable that somebody could pay a hefty tax for their inherited "spousal" social security, only to see the benefits for which they paid taxes noticeably cut years down the road.
We are very glad and grateful to find this out before we moved to Japan. It seems relevant to "pay it forward" by sharing what we've learned because this particular part of Japanese inheritance tax law often seems to catch people by surprise and, for some, it can be financially very destructive.
by InteRest_LEtuCe2467